Site Unseen: More 'Angels' Invest via Internet

Risks Abound, but Investors Search for Promising Startups

By

Sarah E. Needleman and

Lora Kolodny

Jan. 23, 2013 7:34 p.m. ET

After
Adam Winter
read about a roving teleconferencing robot, he got a hunch that the $2,000 gadget might become the next big thing.

So the 38-year-old technology consultant from Columbus, Ohio, sat down at his computer earlier this month, clicked a button and committed to plunk $10,000 from his bank account into the 18-month-old Silicon Valley startup that developed the robot.

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Mr. Winter used an investment website called AngelList and its new "Invest" button. "You say how much, hit 'go,' and you're committed," he said. "It's almost as easy as the Amazon one-click checkout."

"It's a totally new way of raising startup capital," says
David Cann,
co-founder of Double Robotics, the Sunnyvale, Calif., firm in which Mr. Winter invested.

About 50 "angels," or individual investors in small businesses and startups, put money into Double Robotics with the Invest button.

Neither the 31-year-old Mr. Cann, nor his 28-year-old partner,
Marc DeVidts,
have met any of those investors. "Money is money," Mr. Cann says. "We're happy to take it from whomever."

AngelList (Angel.co), a networking site for entrepreneurs and investors, has been around a couple of years but previously offered users only the opportunity to create a profile and share information, hoping to raise money in the process.

Some critics say it is foolhardy to rely heavily on online research and tools to make startup-investment decisions, without ever meeting or even talking to the entrepreneurs involved.

"You're adding a whole layer of risk to an already very risky investment class," says
Jeffrey Sohl,
director of the Center for Venture Research at the University of New Hampshire. "With most of these investments, you're going to lose money."

ENLARGE

A work table at Double Robotics, which has raised funding to support the roaming video-chat robot it makes.
Jason Henry for The Wall Street Journal

The AngelList site prominently posts stern caveats, stating bluntly, "Startups are very risky investments. Expect to lose your money." AngelList also warns that it doesn't verify the information posted by startups.

It is more than a Wild West, though. The Invest tool on AngelList is powered by New York-based SecondMarket, an investment platform that is licensed as a broker-dealer by the Financial Industry Regulatory Authority and Securities and Exchange Commission. It allows up to 95 accredited investors—individuals with a net worth of more than $1 million, or with annual income exceeding $200,000 for more than two consecutive years—to commit as little as $1,000 each in a startup. Forming something called a single security fund for each deal, SecondMarket alleviates a startup's need to follow up with each individual investor to collect the money.

So far, 11 startups have used the Invest tool. All were handpicked and invited by AngelList and SecondMarket. They wouldn't disclose names or details because of regulatory concerns.

Unlike with crowdfunding websites like Kickstarter, people who invest through AngelList get a stake in the startup, although terms vary per company and per deal. On Kickstarter, supporters usually are promised a product or something related to the project they helped to fund. Kickstarter users can contribute a few dollars, whereas AngelList has a minimum of $1,000.

Double Robotics turned to AngelList when it was seeking $300,000 as a safeguard to deal with any problems that could come up when the company starts shipping its new device. On the website, Mr. Cann created a profile where he told potential investors that his startup had nearly $2 million of preorders and that he and his co-founder—both engineers—had recently participated in an elite program for entrepreneurs.

For now, the AngelList "Invest" tool is free for startups and investors to use while AngelList and SecondMarket figure out a way to monetize it, but many angels are cautious.

Catherine Mott,
a retired entrepreneur in Pittsburgh who has been an angel investor since 1999, says she won't back a company until she—or a member of the 65-member local angel group she leads—has spent at least 20 hours of face time with its founders and team.

"It's no different than when you go hire someone to work for you," says Ms. Mott, who hasn't invested through AngelList. "You just don't blindly reach into a bag and pull out a résumé and say this is the one I'm going to hire."

After spending more than a dozen hours last year with the staff of a tech startup that piqued her group's interest, Ms. Mott says it became clear that the startup team wasn't working together effectively. "One team member didn't know what other was doing," the 57-year-old said. "It gave us great concern."

Ms. Mott decided not to invest in the company based largely on her in-person observations. "You can't evaluate group dynamics and a manager's ability from a distance," she says.

Brian Cohen, chairman of the New York Angels Group, an angel-investment group with 97 members, says he understands why some investors—those living far from entrepreneurial hubs like Silicon Valley and New York— may be tempted to trust what they read online to make investing decisions.

"You get so excited about the possibilities," says Mr. Cohen, whose group hasn't used AngelList's new Invest tool. "Even the best angel investors get caught up in the excitement."

Still, he advises angels to do as much research into a potential investment as possible before committing to a deal. "Not doing due diligence is like having unprotected sex," he says. "As you scale up the amount of dollars you put in, you need and want to do more due diligence."

Kevin Moore,
43, a former investment banker who owns Applied Practice Ltd., an education-publishing business in Dallas, says new angel investing services on the Web have made it possible for him to invest in startups situated far away, such as in Silicon Valley. Over the past year, he has invested using AngelList-SecondMarket, FundersClub, and MicroVentures.

While he's spoken with some of the entrepreneurs whose startups he funded through those platforms, he says he opted to invest in them mostly based on information he found online, including founders' portfolio websites and social-media profiles, coverage of their companies by tech blogs, and comments about their products within the funding sites' discussion forums. He also would conduct research on angels already committed to a startup, if he didn't recognize them, checking their background and domain expertise.

Mr. Moore says he previously struggled to get in on deals with "highfliers" whose companies scored funding from "an old boys' network" of New York and Silicon Valley investors. With the new platforms, he is able to get in on these deals, alongside big- name investors, offering smaller amounts than he had to before, and without any special invitation to do so.

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